The invention relates to an evaluation method, in particular, to a method of selecting an investment manager.
Traditionally, the process of selecting an investment manager includes several steps. In a first step, a “long list” of Managers invited to bid for the mandate is established. The length of the list is limited because of the cost involved in processing even superficially. In a second step, questionnaires are sent to each potential manager. Questionnaires are not standardized and the risk of misinterpretation is high. In a third step, the numerical and textual answers to the questionnaire are analyzed to identify a short list of finalist managers. The analysis is partly computerized and partly performed by human analysts and thus influenced by subjective interpretations. Therefore, it is often not clear exactly why some managers do not appear on the short list. In a fourth step, the shortlisted managers are interviewed. In a fifth step, the decision is made as to which Manager is the most appropriate given all the particularities of the Sponsor.
Investorforce, a company based in Wayne, Pa., operates a website (investorforce.com) which offers the state of the art in manager search. It is one of a number of new providers that use Internet technology to streamline the process and enhance some aspect of the search process. According to their website, through InvestorForce's service called SEARCH EXCHANGE™, institutional investors can “submit customized RFPs online to which investment managers can respond . . . . The institutional investor then narrows the candidates to a group of finalists . . . . Throughout the process, the investor can compare performance data through side-by-side charts and graphs and can analyze responses to customized inquiries from investment managers to reach a decision.”
Thanks to these new providers, the cost of due diligence (applying the above-mentioned points) in the search for managers (in particular, the analysis of answers phase) has been considerably reduced. At the same time, a much larger number of potential managers can compete for a given mandate, and thus the likelihood of selecting better managers has improved. Furthermore, from the standpoint of the investment management industry, the cost of searching for new clients has been reduced. Although it is not yet used universally, this type of Internet-based manager search is growing rapidly.
In order to decide which manager(s) is the most appropriate, the investor still needs to go beyond the analysis offered by the new providers. For example, let's assume that “CalPERS”, the largest US pension find, decides to utilize the search exchange capability of Wayne, Pa.'s InvestorForce.com to complete the competitive search process online in early January. A selection is not expected to be made final before late March. Thus, in order to appoint 5 to 10 managers in such a case, 3 further months of analysis are necessary to complete the search.
The new providers have been able to improve the manager selection process each time numerical data was involved. However, as experts familiar with this industry well know, the selection of investment managers cannot solely depend on the analysis of pure data.
Recognizing this fact, several new providers also provide non-numerical information in a somewhat standardized format. But the information still has to be screened, analysed and compared by traditional mostly human approaches. The drawbacks of this approach are, among others, the limited number of managers that can be analyzed and compare, the high cost of human analysis, the time it takes to perform the analysis and the risks associated with the subjectivity of the process. What is needed therefore is a method that can reveal the similarities between a large sample of competing firms in a more scientific, objective manner.